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Mega Backdoor Roth in TurboTax

posted on April 12, 2016

A mega backdoor Roth means making non-Roth after-tax contributions to a 401k-type plan and then taking the money out (with earnings) to a Roth IRA. It’s a great way to put additional money into your Roth IRA without having to pay much additional tax. Not all plans allow non-Roth after-tax contributions but some estimated that 40% of people can do it.

Suppose your plan allows it and you executed a mega backdoor Roth. You will receive a 1099-R from the plan in the following year. You will need to account for it on your tax return. It’s quite straight forward. Here’s how to do it in TurboTax Online. TurboTax desktop and other software should follow a similar process.

First the scenario:

You contributed $10,000 as non-Roth after-tax contributions to your 401k. By the time you requested a rollover to your Roth IRA, your contributions earned $100. You rolled over $10,100 to your Roth IRA.

Now the entries into TurboTax Online.

Add a new 1099-R. Enter the numbers as shown on the 1099-R form. Box 1 Gross Distribution is the amount you rolled over. Box 2a Taxable Amount is the earnings on your contributions. Box 5 Employee Contributions is the amount of your contributions. Box 7 should show a code G.

Say no when it asks you whether it was rolled over to a Roth 401k unless you actually rolled over within the plan as opposed to sending it to a Roth IRA.

Now say yes.

Confirm that you made after-tax contributions to your plan.

Confirm the amount of your contributions. The number is already filled in from Box 5 of your 1099-R.

Not a public safety officer, unless you actually are one.

Did not move it back.

That’s it. You can confirm that you will only pay tax on $100.

Under My Account on the top, click on Tools.

Then View Tax Summary.

Preview my 1040.

Scroll down to line 16. Line 16a shows you rolled over $10,100. Line 16b shows only $100 is taxable. With a mega backdoor Roth, you got extra $10k into your Roth IRA. After paying tax on this $100, the earnings on the $10,100 going forward are tax free.

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Comments

Hi Harry,
Thanks a lot, you are a wonderful and knowledgeable teacher. But here you have mentioned only @ 401K plan –Mega door if it allows. While you were on vacation I had left you a question on another link on your spreadsheet calculations for Business income Mega door Roth amount.I am still waiting for an answer on that.
Thanks

Good idea. As long as the IRS computers aggregate all of my 1099-Rs and match against an aggregation of all of my 5498s, it will be correct (if they try to match one-for-one, it will get kicked out as not matching).

Thanks TFB, I’ll give that a shot.

I like that idea much better than Turbo’s suggestion that I alter Box 5.

When I transferred my after-tax 401k to my Roth IRA account, they made a mistake and put my money into my traditional IRA account instead of my Roth IRA account. Then I transferred it to my Roth IRA account. Therefore I received two 1099-R with same amount of money (one from the 401k institution, and the other from the IRA brokerage firm). Based on your Turbotax walkthrough, what differences should I do to make sure both 1099-R are covered? Thank you very much!

It would’ve been best to correct the mistake when it happened as opposed to letting it stand and building up on the mistake.

Now, it depends on who made the mistake and how exactly you transferred the money to your Roth IRA. If the 401k provider processed your request to rollover to a Roth IRA as a rollover to a traditional IRA, which matched what actually happened, AND you did the transfer as a recharacterization (not a conversion), you don’t have any problems. You just enter two 1099-Rs separately. If you did the transfer as a conversion AND you don’t have other traditional, SEP or SIMPLE IRA that creates a pro-rata issue, you also don’t have any problems. If you did the transfer as a conversion AND you do have other traditional, SEP or SIMPLE IRA, you run into a pro-rata issue which makes you pay tax on the conversion.

If the 401k provider processed it correctly as a rollover to a Roth IRA but your IRA provider deposited the money into a traditional IRA, you have a mismatch between paper and reality. If you subsequently did the transfer as a conversion, you have a potential issue with paying tax twice. The 401k provider’s 1099-R says you should pay tax because you rolled over to Roth. The IRA provider’s 1099-R says you should pay tax because you converted from traditional to Roth.

Thank you so much for the detailed response! My 401k provider somehow did not include my roth IRA account number when sending the check to the IRA provider so the IRA provider intuitively deposited the check into my traditional IRA. The transfer from traditional IRA to Roth IRA is done as a conversion (without pro-rata issue). May I ask how do I find out whether the 401k provider processed the check correctly as a rollover to a roth IRA or not? The 1099-R they sent to me has code G in box 7. Does it mean they did it correctly?
So if my case creates the “mismatch between paper and reality” situation, what can I possibly do? Sorry for my multiple questions and thank you for your patience and help!

If the 1099-R from the 401k provider looks like the one in this post, with a small taxable amount in box 2a and your after-tax contribution in box 5, the 401k provider did it correctly. It would be rare to have two mistakes on top of each other and end up matching the reality. Although the check didn’t include your Roth IRA account number, it likely included the word ‘Roth’ there. Contact your IRA provider and ask for a copy of that check. If it had the word ‘Roth’, that’s your proof the IRA provider made the mistake and it gives you reason to ask them to correct that mistake. In order to correct it, they may ask you to recharacterize your conversion first, which makes the money go back to the traditional IRA. Then the IRA provider can do whatever is necessary on their end to move it into the Roth IRA again the right way, where it should’ve landed in the first place.

Thank you. I called the IRA provider and they only claims that they will send out form 5498 in May to show that the distribution amount in their 1099R is from a rollover, which should “offset” the taxable amount. I don’t know whether it is true and it did not help me with my tax return using turbotax at this moment either. I think I might go to a CPA instead.

It’s not true. Get the copy of that rollover check and show them they put it in the wrong account. Get them to correct it. A CPA won’t help if the IRA provider doesn’t correct it because the CPA can’t change reality. A CPA can help you with the paperwork to report the reality only *after* the IRA provider corrects it.

Hi Harry,
Thank you for all the advice. I really appreciate it! It turned out the 401k provider forgot to mention anything about my Roth account. I will try to go to my IRA provider tomorrow and talk to them one more time to see if any correction is possible. My distribution is about 7k and double tax means paying ~2k more for me!!

In that case ask your 401k provider whether they can redo your 1099-R to make it a rollover to traditional because they didn’t mention anything about Roth to the receiving end. When they do a rollover to Roth they are supposed to say Roth.

Hmm, it sounds quite doable. I will definitely try it tomorrow. But I guess I am still a little confused. After the 401k provider redo the 1099R to make it a rollover to traditional IRA, I assume this 1099R will not make me pay tax at all (for the entire distribution including the small amount of earnings, is it correct?). But for the 1099R from IRA provider, how do I make sure I only get taxed on the small earnings? This 1099R from IRA provider looks exactly like the one you would get by doing backdoor Roth as shown in your post “How To Report Backdoor Roth In TurboTax”.

Another question is, in this case can I still use turbotax for tax return or I will have to find a CPA to get it done properly?

Correct. The only difference is box 2a will show 0 for a rollover to traditional. You just enter the two 1099-Rs independently. On the IRA conversion one when it asks you about your basis, you put in the number in box 5 from the 401k 1099-R. TurboTax can still do it.

Thanks Harry, great post! I have a question regarding my SEP IRA account. Do I have to “hide” that balance when performing a Mega Backdoor Roth IRA from my 403b account? In other words, do I trip the pro-rata rule if I have a SEP IRA when doing a Mega Backdoor Roth conversion?

I have a question about the step which asks for the after-tax contributions. In 2017 I contributed about $15k after-tax, but since my plan only allows quarterly in-plan Roth conversions I ended up only being able to rollover $12k to my Roth 401k, which is what is listed on my 1099-R in box 5. Do I keep this $12k as listed since that was what actually went into my Roth 401k, or list what my actual after-tax contributions were during 2017 ($15k)?

Only the $12k as shown on your 1099-R. Please note for an in-plan rollover to Roth 401k you would answer ‘Yes’ to the question after the 1099-R entries and follow from there. The screens aren’t the same as a rollover to a Roth IRA shown here.

Thank you for this detailed post. I did this for 2016 returns and did not see a Form 8606 being prepared by TurboTax. Is Form 8606 necessary in this case? If yes then probably I need to amend my 2016 returns.

Thank you for the excellent articles on this site! It has really helped me learn a ton!

Back in 2016, when I first made the after-tax contributions to my 401k (about $5k), I wasn’t entirely sure on how to do the traditional/roth conversions – so I got scared and simply requested a withdrawal and encashed the check received. I didn’t have any earnings/losses from this – so I thought “since I had already paid taxes on the contributions (they are after tax contributions after all), there was nothing here for me to report on form 1040” – so I left boxes 16a and b on form 1040 blank. However, I just received a notice from the IRS yesterday, showing this $5k amount as taxable and ordering to pay back taxes of $2k. However, the 1099-R clearly shows the $5k in boxes 1 and 5 and box 2a shows $0. Is it enough for me to simply fax this copy of my 1099-R to them to remove the charge? Or do I need to offer more explanations? Or do I really owe taxes? FWIW, I am much much younger than 59.5 years.

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